Consumer is King » Banks

What are reverse mortgage loans – some details and explanation

ashish — Wed, 21 Apr 2010 07:06:42 +0000

Mortgage loans is the concept where a person takes a house loan, and then gradually repays the loan over a period of time. However, some years back another concept got introduced in the consumer market in India, which was meant to also provide a measure of succor to senior citizens when they needed money. The concept was that if they owned a house, a bank or a financial institution would provide them money against their house till the end of their natural life. The house would then be owned by the bank or financial institution. It serves to convert a fixed asset into a steady income stream meant for the living purposes of people (typically meant for senior citizens).

Repayment of the money paid by the bank

How is the money provided by the bank or the financial institution repaid ? This money lent by the bank or the financial institution is not meant to be repaid by either the person getting the money or by their heirs, instead the bank gets its required money through the sale of the house at the end of the life of the person getting the money. In case the amount outstanding paid by the bank is less than the value of the house, the difference is paid to the person or their heirs. However, if the amount paid by the financial institution is more than the value of the house, the bank or financial institution will have to bear the loss. When both the spouses die, the heirs get an option to either pay off the outstanding amount (money paid + interest), or they can sell off the house.

Freeing the house from the reverse mortgage

If you want to get the house freed from the reverse mortgage, then you would need to pay the bank or the financial institution the amount outstanding already paid out by the bank as well as the interest on the loan. Freeing the property like this by repaying the amount does not prevent you from applying a reverse mortgage on the house again if required.

Is the reverse mortgage a popular instrument ?

For Indian families, the house is a very emotional bond to the family, and a lot of people refuse to even consider any instrument that could mean eventually losing control of their house. However, the steady amount of money paid by the bank or financial institution is a big savior for many senior citizens who live in houses but otherwise do not have a stream of income and suffer from shortfalls in their income leading to a reduction in their standards of living. This was introduced in the Union Budget of 2007-2008. Further, the person stays in the property for their entire life, so do not really get the concept of separation from the house. However, there should not be any existing loan outstanding on the house.

Guidelines for reverse mortgage products as prepared by RBI:

The maximum period of property mortgage is 15 years with a bank or HFC (which means they will get money for 15 years, but can continue to live in the house till their death).
The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
Any house owner over 60 years of age is eligible for a reverse mortgage.
The revaluation of the property has to be undertaken by the Bank or HFC once every 5 years.
The maximum loan is up to 60% of the value of residential property.
The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

Prepayment penalties imposed on banks when people try to clear off their loans early – no resolution

ashish — Fri, 05 Mar 2010 12:51:18 +0000

If you have taken a home loan, then you wonder at the huge amount of loan outstanding, as well as the number of EMI’s that have to be made (these EMI’s could be large sums of money that would go over many years, possibly over a decade or more); but it is worth it if you want to own that first or second home; in fact if you did not have a home, and the loan amount allowed you to buy your own home rather than live in rented accommodation, you would certainly consider the home loan to have been worth it.
But, as time moves on, you have to consider your finances. You find that the home loan you took was at a rate of interest that is much higher than the current rate of income in the market, or even the bank from which you took the loan once is now offering a rate of interest that is much lower than the loan you are servicing. And you would like to change your loan so that you can avail of the lower rate of interest – and then you run into the instrument that banks apply to prevent you from doing that. This is called the prepayment penalty, and it means that the bank will charge you a certain penalty if you want to make a prepayment to your loan (this could be prepayment above a certain amount, or if you try to pay the whole amount back).
Recently, the Competition Commission of India had declared that it was thinking of imposing a penalty on banks that impose such prepayment penalties, since the penalty acts as a deterrent to people who want to change their banks; however, recently the Reserve Bank Deputy Governor, Usha Thorat has weighed her opinion on this matter, claiming that such a policy would force banks to charge more in terms of enhanced interest rates so as to cover their finances (link to article):

Reserve Bank Deputy Governor, Usha Thorat, said abolishing the practice of levying pre-payment penalty on loans could prompt lenders to hike interest rates to pass on their burden to customers. “There is a chance that banks may pass on this burden to customers (if the prepayment penalty is abolished),” Thorat told reporters.
Banks usually impose a penalty in the range of 2-3 per cent on those customers who choose to close their loan amount before maturity. This, bankers said, would impact their interest earnings besides increasing lending risk.

Bank drop boxes don’t always work

ashish — Tue, 06 May 2008 04:57:24 +0000

We have come to regard bank drop boxes as a great extension of the branch; dropping checks, payment, check book requirements, and similar requests into these drop boxes. For credit card payments, where the required date is very close or even today, it seems like we can just drop the check in the drop box the same day and avoid a late payment. So, it will surprise people to know that this is nowhere near being a fool-proof instrument, and is subject to many delays and lack of responsibility by the bank. Refer this article:

A Mumbai resident recently dropped his credit card payment cheque in a box placed at a travel company. Although he dropped it four days before the due date, the amount was not debited from his account. Despite registering a complaint with the bank’s customer care helpline, his card was deactivated. To top it, he has been asked to pay a late fee and finance charges.
While most of us agree that drop boxes at “offsite” centres offer the extra convenience of accessibility, there are suspicions that sometimes they don’t get as regularly cleared as at banks. Besides, a senior banker warns, cheques have been known to get misplaced and misused. Since there is no system of listing cheque details at these drop boxes, it is unfortunately the customer’s word against the bank in a dispute. The official categorically says, “If a drop box does not belong to the bank, using it is at the customer’s risk. For that, we cannot hold the bank responsible.”

Not many customers are aware that the bank does not take ownership for the drop boxes placed at third parties. You can drop a check at the drop box placed in a bank ATM or at the branch, and even there you don’t have any proof of having deposited the check. But if you have deposited the check at a drop box located at a shop or any other such location, then the bank does not even claim ownership of the drop box and will refuse to take any liability for the check. This is a very strange and absurd situation. If a bank has placed a drop box anywhere and expects the customer to use the drop box as representing the bank, then it needs to take responsibility for this facility.

Buyers must be told about loan rate changes

ashish — Sun, 02 Mar 2008 14:59:33 +0000

Financial matters, especially the intricacies involved with loans, rate changes, floating vs. fixed, etc can be very confusing to most people; and it seems that banks play on that. People had taken loans induced by the cheap rates that were being offered, and since floating seemed all the more attractive, many floating rates were taken by people who did not understand the full implications of the change in interest rates on floating rate changes. So, when the interest rates started heading upwards, banks revised their interest rates upwards, and in many cases, did not inform the loan holders about the change in rates. This is against policy where loan holders are supposed to be informed in writing that their loan rates have gone up:

Such lapses may occur due to staff inefficiency or system error. A Delhi personal loan consumer since March 2007, points out Sanjeev Talwar of Delhi’s National Consumer Helpline, hasn’t received even his account statement. Some time ago, in Mumbai again, another floating-rate loan consumer discovered that his EMI amount, sourced directly from his account via the electronic clearing system (ECS), had increased without any intimation about a rate hike. Says V M Oza, honourary director, complaints, at Ahmedabad’s Consumer Education and Research Centre (CERC), “There is a provision that rate change cannot be made unilaterally. The bank should inform the customer about it without any hindrance.”
The ombudsman official agrees: “A Reserve Bank of India circular says in case of an increase (in interest rates), the customer must be informed, so if he is not interested, he may be given a chance to repay or shift to another bank which offers a lower rate of interest. In case the bank is at fault (by not informing the customer), it has to take a sympathetic view as this is not in keeping in line with the instructions.”

So, if a customer has not received a change in loan terms intimation from his bank, and is then charged a penalty by the bank, the customer will within his / her rights to ask the bank to waive the penalty due to not having received the new terms. In fact, it is advisable that customers only accept written intimation so that they have the required proof in case of any disputes.